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The Basics Of NFTs: Digital Art & Collectibles on the Blockchain

In this infographic, the Expensivity team explores the core basics of NFTs, and we attempt to explain the concept in a way that beginners can understand. For a more in-depth look at the functional details of NFTs make sure to check out our exclusive feature article on How Non-Fungible Tokens Work.

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In the first half of 2021, non-fungible tokens (NFTs) garnered $2.5 billion in sales — up from $13.7 million a year earlier

The Basics Of NFTs

  • NFTs are selling for millions of dollars
    Pablo Rodriguez-Fraile @pablorfraile purchased “crossroads” for $66,666 on Oct 31, 2020
    • Beeple:
      • $6.6 million for the 10 second video clip
      • $69 million FOR “EVERYDAYS: The First 5000 Days” the first purely digital work of art ever offered by a major auction house (Christie’s) 
    • Jack Dorsey:
      • sold his digitally autographed first tweet for $3 million
    • Grimes: $6 million made from “WarNymph” a series of 10 pieces
    • 3LAU: $11 million in album sales and digital goods in one weekend
  • What Are NFTs?
    • Cryptocurrency: Digital currency tokens
    • Non-fungible tokens: Represent an asset other than money
  • How Do NFTs Work?
    • Digital keys secure NFTs using the same technology as cryptocurrencies
      • Public key: serves as the ownership assignment
      • Private key: authorizes change in ownership
      • Blockchain maintains an “tamper proof” ledger of transactions
    • While digital collectibles can be copied exactly, blockchain provides secure and effective proof of ownership
    • Any digital file can become an NFT
      • Games: Players earn, buy, or create new NFT game elements — Axie Infinity, Gods Unchained, CryptoKitties
      • Sports: Through the NBA’s Top Shot, fans can buy, sell, and trade licensed video “moments”
      • Fashion: In 2019, Nike patented tech that would give the owner of an NFT design the right to have it manufactured in the real world
      • Music: NFTs can take the place of ticket sales or be used to sell albums, or unreleased songs
      • Charity: NFT for Good offers marketplaces designed to sell digital art to humanitarian causes

[Call Out: The most common use of NFTs is for buying and selling digital art]

Monetizing Digital Art

  • Until blockchain, digital artists struggled to 
    • Prove they were the original creator of a work
    • Monetize artworks that are easily copied
    • Prevent unauthorized use of their work 
  • The Benefits Of NFTs
    • When an artist creates an NFT, they can
      • Enable features that will pay them a percentage of all future sales
      • Sell art that would otherwise be difficult to find a market for
      • Prove they are the original creator and authenticate the digital file
    • For collectors, ownership of the NFT conveys some extra rights
      • Anyone can download a digital file, but only the owner can sell it
      • NFTs collectors can set the image as their profile pic or post it online
      • Most buy NFTs as an investment, hoping the value will increase over time
  • Trading Cards Or Fine Art?
    • In 2021, CryptoPunk #7523 sold for $11.8 million
      • In 2014, Monet’s Water Lilies sold for $15 million
    • What’s the difference?

[Call Out: Digital artworks are never one-of-a-kind]

  • The owner of the Monet gained a unique physical object
    • Fine art can be copied but copies are never perfect
    • Copies of fine art have less value than the original
  • But, digital art is easily copied — and those copies are a perfect match
    • Anyone can download CryptoPunk images
    • The creator could create and sell additional copies as NFTs
  • What Is Digital Scarcity?
    • Digital files can generate unlimited perfect copies — scarcity means other limitations are placed on a digital collectible
      • Partial Availability: A partial form is publicly available to share and copy, but the full version is inaccessible except for authorized parties (owners)
      • Digital Marking: The file is marked in a way that shows ownership, maybe a hidden mark
      • Algorithmic Immutability: The record of ownership is generated by an untamperable algorithm (blockchain)
    • One or a combination of these factors help ensure a collectible remains limited-edition or one-of-a-kind
      • Ultimately the value of an NFT depends on the creator to maintain the scarcity of their digital work and not sell additional copies

[Call Out: “One hard drive crashing could lead to permanent loss of the assets” — Check My NFT]

The Danger Of NFTs

  • Crypto Theft & Loss
  • Chainalysis estimates that 20% of all Bitcoin is locked by people who have forget their private key — That’s equal to $140 billion
    • Losing access can be as simple as forgetting your password
    • Once you’ve lost your private key, it’s unlikely you’ll get ever get it back
  • In 2021, hackers stole $600 million in crypto through PolyNetwork — the largest single event crypto theft ever 
    • Accessing cryptocurrencies and NFTs requires a private key
    • Private keys can be hacked if used or stored on a networked device
  • The Problem Of Link Rot
    • NFTs include very little data by themselves
      • Functions like a deed to prove ownership
      • Includes artist’s name and title of the work
      • The collectible is usually linked with a URL
    • What happens if the URL goes bad?
      • Maintaining the URL depends on the web host
      • If the host goes out of business the file is lost
      • The creator could redirect the URL at anytime
    • Many NFTs rely on InterPlanetary File System (IPFS) to distribute files across multiple hosts 
      • Protects against a single host going under
      • NFT owners can choose to pay for continued hosting
      • But no single party is responsible for maintaining the file
  • NFT Scams Are Growing
    • EVERYDAYS: The First 5000 Days by artist, Beeple was purchased for $69 Million by crypto-investor MetaKovan (Vignesh Sundaresan) & by the artist Beeple

(Michael Joseph Winkelmann)

  • Both had an interest in driving up the price of NFTs
  • Artist Derek Laufman discovered someone had create a verified profile in his name to sell his art as NFTs
    • The impostor account was shut down, but only after purchases had been made
  • If you’re considering an NFT purchase, watch out for likely scams
    • Doppelganger stores and crypto wallets
    • Counterfeit collectibles and digital art
    • Free giveaways & NFT airdrops

NFTs are legitimate, but buyer beware